Top 10 Most Misunderstood Facts About Debt Settlement

6. “Settling Your Debt Will Improve Your Credit and Debt to Income Ratio.” Some debt settlement companies say debt settlement will help your credit report because it will lower your outstanding debt to income ratio. But that’s not the whole story. When you fall behind on your bills in order to settle your debt, the delinquency will be reported on your credit report for seven years from the time you became delinquent. Any lawsuits to attempt to collect the debt will appear as well. The balance of the debt that was settled and not paid, will appear as a bad debt for seven years as well. At the end of the process you may no longer owe your creditors but your credit report will be damaged and need some serious attention to bring your credit score back up.

[Resource: Consumer Guide to Debt Settlement]

7. “You Can’t Trust Any Debt Settlement Company.” This is simply not true. Some debt settlement companies, and especially those that are a member of the AACC, are open and transparent about their actual performance in settling debt, only charges you a fee as a percentage of savings when they do settle, and will maintain any payments you make in a bank account monitored by a third-party escrow company. You want to look for a company that will share their actual performance statistics with you in writing to show you their track record. Working with a good debt settlement company can be beneficial if debt settlement is right for you. They will have the experience to know if the deals being offered are good based on the current policies of the creditor.

8. “You Have to Hire Us to Settle Your Debt.” There are some companies out there that will teach you how to settle your own debt for a fraction of the cost of paying a settlement company to do it for you. They can guide you through the process and coach you when you have questions or concerns as you go. Two of the companies that offer this coach supported process are Consumer Recovery Network and ZipDebt.

9. “Hiring an Attorney to Settle Your Debt is the Best Way to Go.” It is not necessary to pay a lot of money to hire an attorney to settle your debt. Settling debt is not a function of legal pressure, but more of knowing the current policies and procedures of the major creditors. If you have a local attorney that is going to perform all the work locally, and you have a trusted relationship with that attorney, then maybe you’ll want to work with them. However, if you are being pitched debt settlement services by a salesperson for debt settlement services provided by a legal network, then you may want to get a second opinion before you agree to enroll. I find these legal networks to be pricy and charge all their fees on the front-end of the program, before the debt is settled, even if they never settle your debt. And while these legal networks may promise to represent you if you are sued, the devil is in the details. You can read my review of one of these attorney network model contracts here. I think you’ll be surprised what it didn’t cover and how it really cost about twice as much as other debt settlement companies offering performance based fees.

[Resource: Get your free Credit Report Card]

10. “Debt Settlement is the Best Way to Get Out of Debt.” Debt settlement is not for everybody. It is one arrow in the quiver to pull when dealing with debt problems. Other common solutions include credit counseling, bankruptcy, making income or budget adjustments, a debt consolidation loan, and working with the creditors directly. Debt settlement is most appropriate if you have cash on hand to pay 50% of the balance owed without raiding retirement accounts. While debt settlement may help you avoid bankruptcy—and is sold as a way to avoid bankruptcy, bankruptcy is not a process to be feared. In fact, it is the only solution that gives you any legal rights and power over the creditors regarding debt problems.